How To Success With Business Factoring & Understand Factor Cost In AR Finance

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Business factoring in Canada. It's A/R Financing. You can't handle the truth! Or can you? We think you will be able to review the basics around business factoring in Canada, what is the true factor cost of AR finance (ar = accounts receivable). Let's dig in.

Your firm's ability to get financing around the most liquid and accessible business asset you have - your receivables - is what can make or break many small and medium-sized businesses.

The big corporations seem to have this down quite well already, as they have large, sophisticated infrastructures for credit and collections, as well as access to corporate borrowing and securitization facilities that smaller companies don't have. By the way, we can make a strong case that the big guys use factoring, but they call it securitization!

So what's the true cost - (it's not what you think it is!) and, even as critical - picking your partner in this method of Canadian business financing.

Is your firm eligible for a business factor facility? If you can answer yes to one single question - 'Do you have accounts receivable?' then, you guessed it, you're eligible!

In many cases, if you are working with the right firm, you can blend in receivable and purchase order financing into the same facility - the names tend to change then, as we refer to that as asset-based lines of credit and working capital facilities.

So, it's always about cost. We don't think so, but our clients sure do, so let's invest some time to discuss the real factor cost of a/r financing in Canada. Part of the problem in addressing the cost issue is clients' perception, totally understood, of course, that factoring costs are viewed as interest rates by the borrowers.

That's not how the industry views it; they buy something you are selling at a discount. That discount rate is often (99% of the time!) interpreted as an annual interest rate. So while the factor firm buys your receivables at a rate of between 1-2% (every month), our clients gasp and view that as 12 - 36% annual percentage rates.

So, how do you assess the factor cost then? Here are the elements you should consider in assessing business factoring in Canada. First of all, if you don't have some decent gross margins on your products or services, then even bank financing or carrying your own receivables is expensive. So a solid gross margin is important.

To calculate your margins, of course, simply take your gross income and divide that number by your sales revenue and express it as a percentage. The number, of course, shows you how much you are making considering the costs you incur in actually producing that product. Naturally, service companies usually have great margins because there is no direct cost of sales.

Other issues to consider in understanding the true cost of factoring are how long it takes to collect your receivables and the actual cost it is taking you to carry that investment. And don't forget the concept of lost opportunity - you can take your factoring cash and turn that into additional sales and profits, as opposed to waiting for a cheque to come in 60- 90 days later.

Our final point is that the cost of factoring can be significantly offset by your ability to take discounts and purchase more smartly, in quantity, etc.

In summary, the true factor cost of AR finance is probably not what you think it is. Thousands of firms that use and offer this service can't be wrong.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Factoring Factor Cost AR Finance | 7 Park Avenue Financial

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